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Pension investors: Are you asking the right question?

Surging equity values have helped shore up pension pots in the last 12 months, prompting fears of a correction, but anticipating the market’s next move is a bad idea.

Article updated: 21 November 2017 at 10:00am Author: Pascal Dowling

The average pension pot hit £49,988 in 2017 – an increase of 40.3% on the size of the previous year’s average pot – according to research published by retirement specialist Aegon earlier this year.

Increased awareness of the need to save for retirement and the introduction of autoenrolment have contributed to this growth in provision, but the strength of the bull market which we have seen in recent years, and the effect this has had on pension portfolios, cannot be ignored.

The FTSE 100, the index representing the UK’s largest companies, and its American equivalent – the S&P 500 – have both hit record highs repeatedly in 2017, and the 42% increase recorded by the MSCI World index since the start of 20161 corresponds almost exactly with the increase that the average pension pot has seen in its value between 2016-17.

This is good news if you’re lucky enough to be one of the pension investors who’ve benefited from this increase, but it is tempting to wonder at this stage what the next phase of this market might be, and to ask whether now is the time to lock in those gains which have already been made.

There are various ways to do this. You can pull your money out of the funds you’re invested in, and hold it as cash – but you’ll miss out on any further gains from the market – or you can reallocate to funds which you think are better placed to cope with a downturn; those with more diversified assets, or those with flexible, capital preservation focused mandates.

But should you? Unfortunately, there is no right answer. Common sense suggests that after a period of such strong performance we are likely to see a correction, and there is no shortage of commentary in the media suggesting a correction is ‘due’, as if there were a celestial timetable for this, privy only journalists.

Common sense, and the newspapers, point to clear threats to the health of the current bull market. The UK could crash out of the European Union without a deal. The standoff between North Korea and the United States could go nuclear. China’s financial system could collapse.

Common sense is a false friend, however, which saw many investors – me included – running for the hills in June last year, dumping UK equities and heading for safe havens like gold and US treasuries, when the Brexit vote came back in favour of leaving the European Union. The FTSE All-Share has rallied by almost 30% since.

And it’s not a one-sided argument. Anatole Kaletsky, chairman of the Institute for New Economic Thinking and chief investment officer at Gavekal Economics, argues in a paper he published earlier this week that, far from being the peak of a bull market, we are in the midst of a structural expansion which has many years left to run.

For the first time since 2008, he argues, the US, Europe, China, and most other big emerging markets are experiencing decently strong economic growth without threats to financial stability. He thinks emerging markets and Europe, in particular, are well positioned to benefit from what he describes as ‘a world economy firing on full cylinders’.

In Europe, he says, fears that the EU’s banking system might collapse were put to bed by Mario Draghi’s QE program, and fears that the political unity of Europe would dissolve in the wake of Brexit were proved untrue in the French elections, putting the continent in good shape at least until the next election cycle in four or five-years’ time.

In China, with the economy recovering strongly, fears of a Chinese banking or currency crisis have dissipated and the country – as the world’s largest exporter – looks set to benefit from the global recovery.

The fact that these signals are so conflicting is frustrating, until you realise you’re asking the wrong question. Trying to work out which way the market is going to go is a mug’s game, and there’s no evidence to suggest that anybody has been consistently able to do so, ever.

The question pensions investors should be asking themselves instead, as the market surges to new heights, is: when do I hope to retire?

Pascal Dowling

The answer gives you a much clearer idea of whether now is a good time to lock in the gains you’ve made in recent years and take some risk off the table, or whether you should brave these giddy heights and stay invested.

Volatility is the key here. The closer you are to your retirement date, the more it matters, and over the next few weeks I will be looking at funds across this spectrum – highlighting those which may be suitable for investors at the start of their pensions ‘journey’, and moving on to those which offer a more diversified, lower volatility approach that may be preferable for those who are closer to the end. Finally, I will look at funds which offer the kind of characteristics a pensioner might look for after they retire; a regular, predictable income and a solid focus on capital preservation.

Pascal Dowling

Marketing & Communications Director, Kepler Partners

Pascal oversees marketing and PR activity at Kepler Partners and runs Investment Trust Intelligence, an online research hub for professional and private investors. His background is in financial journalism and he used to manage retail fund research website, FE Trustnet.

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